Postage Pushing The Security Envelope
Internet postage sounded like a natural. You would download an electronic "stamp" from the Web onto your computer and print it on an envelope using any printer. Bye-bye, long lines at the post office. Hello, Stamps.com.
At least that was the pitch that helped the Santa Monica, Calif., start-up rake in hundreds of millions of dollars from the public through, not one, but two splashy stock offerings in 1999. Unfortunately, some folks who bought shares in Stamps.com in those days didn't give a close read to the company's filings with the Securities and Exchange Commission. In them, Stamps.com disclosed that it still lacked approval from the U.S. Postal Service to sell digital postage.
When Stamps.com and rival E-Stamp finally succeeded in winning federal approval for their fledgling services, it came with restrictions that severely limited their appeal to the public. And that might have spelled the end of Stamps.com had not anthrax spores turned up in ordinary letters.
Now, there's new demand for ways to make mail more secure, and Stamps.com sees an opportunity to eliminate some of the restrictions that have hobbled it. Trial tests of a less fettered service get underway this month.
A digital stamp is essentially a bar code that identifies the sender and amount of postage. Under current rules, the U.S. Postal Service also insists that senders encode the stamp with the precise destination — a restriction intended to prevent people from copying and using the same digital stamp twice.
That rule, however, made the service less appealing because it required users to go to the Internet to enter an address each time they wanted to mail a letter. Wouldn't it be more convenient to have digital postage available off-line, too?
Stamps.com has been lobbying the Postal Service for permission to replace that fixed-address feature with a new form of fraud prevention: special paper with a pre-printed stripe that disappears if you try to copy it. Stamps.com officials offered a demonstration to postal officials last week. Stamps.com chief executive Ken McBride said the blue stripe vanished from the copy, a trick caused by heat sensitivity in the ink that is triggered by photocopier lamps.
This special paper allows people to print sheets of digital stamps that could be used whenever they are needed. The special sheets would also allow the company to win an exemption from another rule, one that requires digital stamps be used within 24 hours of being printed.
The Postal Service gave the green light to Stamps.com to test its specially treated paper after anthrax spores turned up in the mail. One benefit of digital postage is that it makes letters traceable by using serial numbers that identify the purchaser. While nobody expects terrorists to use Internet stamps, traceable postage could give comfort to people fearful of opening letters from strangers. In addition to the Stamps.com idea, the Postal Service is also studying whether it might be possible to put digital bar codes on all mail, then subject envelopes that lacked identifying codes to greater scrutiny.
"There are a variety of conversations going on in the Postal Service about putting more intelligence into the postage and mailing envelope," said Roy Gordon, who supervises the Postal Service's Internet postage program. "Clearly the events of last fall have provided an opportunity for us to examine many things in the Postal Service, and this kind of intelligence could potentially help us with the security challenge."
The anthrax episode opens a new chapter in the saga of Stamps.com, which likely will merit a mention in dot-com history books if for no other reason than how it illustrates the fits and starts accompanying the birth of many Internet products.
Since investors soured on dot-coms, Stamps.com has repented of its spendthrift ways. It shrank its workforce from 550 people to 60, and has cut its cash-burn rate down from a whopping $14 million a month to nothing. Meanwhile, it has more than doubled its basic monthly fee from $1.99 to $4.49 (users pay fees on top of the stamp's face value), sold a dot-com it bought called iShip to the United Parcel Service, and retreated from other costly side businesses. Stamps.com still lacks profits, but it has banked $194 million and acquired various patents from its defunct rival E-Stamp.
The market to date is tiny. The Postal Service has said the total number of customers paying for Internet postage is fewer than 400,000, with more than 80 percent going to Stamps.com. Mail-metering giant Pitney Bowes also is among the four licensed Internet postmasters but hasn't promoted its Internet product much.
Perhaps that's because cheap Web stamps could cannibalize its profitable metering business; Stamps.com's McBride says his product is 80 percent cheaper than postal meters. Pitney Bowes officials declined to be interviewed. Instead, the company issued a two-sentence statement contending "the best way to deliver value to small and home based business is through a suite of solutions, not just Internet postage." Meanwhile, Pitney and Stamps.com are countersuing each other for patent infringement.
Competition isn't the only problem. Mail industry officials say the Postal Service has hardly been enthusiastic about Internet postage.
"The regulatory hassle these companies have gone through to bring this product to market has been incredible," said Gene Del Polito, president of the Association for Postal Commerce, which represents 320 large mailers. "Now I think people realize PC postage could help change unknown mailers into identified mailers. It provides a vehicle by which the Postal Service could help small businesses and individuals avoid the pain associated with having their mail irradiated for no good reason."
Of course, few industry analysts are so naive as to think a 60-person start-up could kill the nation's traditional postage system. Yet Stamps.com shows how tiny Internet players continue to be a force for innovation in a business world that gives incumbent giants little incentive to change.
